Wednesday, May 15, 2013

Dynamic Pricing as a Market Segmentation Strategy

Rising costs to attend sporting events have been a concern among team marketers in recent years. Fans dealing with strained finances may be left with little choice but to pass on discretionary spending like buying tickets to a game. It is unfortunate that ticket prices are non-negotiable, that a system akin to Priceline's name your own price model is not available to fans so that they can decide to spend based on their ability to buy. Ah, but there is a model that does give buyers flexibility: Dynamic pricing. This relatively new pricing method is often viewed as a boon to sellers, but what really makes dynamic pricing effective is that it can be framed as a customer-centered pricing model.

Demand is the Driver
The secret to success for dynamic pricing is rooted in traditional economics: Buyer demand. Dynamic pricing and its sister tactic variable pricing are based on the fact that not all products (i.e., sporting events) are valued in the same way. Given the variability in the value judgment made on each sporting event that comprises a team's home schedule, it is logical that pricing for each game and seat locations within the venue should be adjustable depending on perceived value. Intangible products like live sporting events benefit from utilizing a demand-driven pricing model because unlike tangible goods they cannot be inventoried and sold later. For live sporting events, key demand factors include:

Opponent -Brand equity of visiting team and rivals influence impact of opponent on demand

Day of week - Weekend games might have higher demand, especially for longer seasons like MLB

Time of year - MLB games in April or September might hold less appeal than games played in summer (correlated with day of week).

The NBA reported its best ever season in terms of gate revenue per game, and dynamic pricing played a significant role in that success. The beauty of dynamic pricing is that gives buyers greater choice in exercising discretion to consume sports entertainment. For buyers who are price conscious, dynamic pricing's sliding scale creates opportunities to take in games at lower than average prices. It is not going to be the Miami Heat and it probably will not be on Saturday night, but attending the game is within their reach because demand variables make purchasing tickets more favorable. For high involvement fans, their decision to attend games in which demand drives prices up in a dynamic pricing model is less dependent on ticket price and influenced more by their identification with a team. Are these fans happy that prices are higher for "must see" games? Probably not, but they will be unlikely to stay away as long as ticket price does not become prohibitive.

It's All About Segmentation
In the end, dynamic pricing circles back to the fundamental concept of market segmentation. A one-price method for sports tickets is bad practice when there is excess capacity. Setting single price points on tickets is flawed because it neglects the fact that buyers do not hold similar value judgments. Dynamic pricing offers lower prices for a segment of the market that places greater importance on price in the buying decision. And, dynamic pricing slides the price scale upward when demand is high for certain events.

Despite the temptation to aggressively tweak prices to maximize revenue, there is one other customer segment that must be managed within the framework of dynamic pricing: loyal customers. Season ticket customers are a committed customer segment that cannot be undercut by dynamic pricing models. In fact, many teams using dynamic pricing have a policy of setting a price floor that will not allow tickets to be sold at a price less than what season ticket holders paid. Criteria that influence value judgments made by season ticket customers likely differ from the single-game buyer who is reached via dynamic pricing. Thus, pricing must protect their loyalty while appealing to other fan segments.